COVID-19 has had a transformational impact on the restaurant industry.
The operating environment changed dramatically, but the flexibility of restaurant operators during this challenging time was astounding. And at the most basic level, all of us still woke up hungry in the morning and began thinking about where and how we find our food each day to satisfy that craving. Here’s what we saw along the way.
Consumers may have permanently changed both their behavior and the way they interface with restaurants. Incredible growth in online and mobile ordering, QR codes for menus on your phone, delivery and curbside pickup, and more all became new routine ways of getting food into hungry mouths.
We used to say fast-food restaurants were recession-resistant; perhaps we can now say they are pandemic-resistant. Drive-thru windows remain systemically important and were bolstered with curbside delivery and redesigns of restaurants to accommodate longer queues. Initially, labor costs dropped, and margins expanded until recently when new labor shortages emerged in the summer.
Delivery became more entrenched despite its significant added cost to the meal, reflective of both upsized menu pricing along with delivery fees. Profitability for third-party delivery companies remains in question despite their wide adoption and frequency of use. Restaurant operators continue to rely on this vital service but remain concerned about margins and consumer price sensitivity as well. Some cities have moved to delivery fee caps, rankling the third-party providers.
Fast casual continued to take the best practices of quick-service operators and apply them to their business to overcome shortfalls in the office lunch daypart and catering segments, where losses were sustained. This segment never had very strong dinner dayparts, but the smartest, more nimble operators developed that piece and ramped up convenience, quality and flawless execution using delivery and digital ordering to fill the gap.
Labor pains got worse in mid-2021, and some pundits targeted generous government stimulus and bonus unemployment benefits as the culprit keeping workers at home. In truth, the answer was much more nuanced. Here are some of the major factors influencing the labor market that led to a shortage of restaurant workers:
- By September, a number of universities had studied the early termination of bonus federal unemployment benefits and found that it did not have a meaningful impact on return-to-work behaviors versus states that preserved them until they expired in early September.
- In July, only 12% of job gains went to women, while their participation in the workforce had fallen to levels not seen since 1988.
- Child care continued to be very challenging, with limited availability of child care workers, overall health concerns and homeschooling situations all contributing to family decisions for one parent to leave the workforce to provide at-home care.
- Age 62 is becoming a much more popular age for baby boomers to leave the workforce, with stock market gains, health risks at work, or just a higher value for quality-of-life issues dominating those decisions.
- Tighter immigration standards created more labor shortfalls and reduced the number of seasonal workers.
- With these segments reducing workforce participation, many restaurant workers were moving out of the industry due to its long hours, low pay and higher perceived risk, among other factors. Many workers instead moved into other equal- or higher-paying nonrestaurant/hospitality jobs that, in turn, exacerbated the shortage.
Restaurant lending was shaken during the pandemic. Portfolios that had higher exposure to casual dining, buffets and even fast-casual in some cases led to decisions to exit the space or pause on new lending opportunities. Meanwhile, fast-food lending recovered more quickly, fueled in part by a wave of mergers and acquisitions in the fast-food segment that remained strong heading into the end of 2021.
We are not done with the pandemic’s impact, but we may be closer to the end than the beginning. Experts are leaning toward a new normal where versions of COVID are pervasive for years to come, requiring annual vaccinations and/or masking in close quarters. Expect more changes in doing business when it comes to restaurants and getting food to guests in innovative ways. Here are a few thoughts about the coming future.
- Increasing labor costs due to shortages, or perhaps pockets of unionization, may push operators to consider more rapid implementation of technological improvements to the business, augmenting a smaller number of workers’ performance in the back of the house or customer interface in the front of the house (or parking lot!). Robots are still years away from widespread adoption, but some chains are beginning to use robotic arms for preparing french fries, automated hamburger cooking assembly systems, or wheeled drone pizza delivery. The more likely near-term improvements will continue to be software development for mobile ordering, labor scheduling and optimization, video surveillance, kitchen prep controls or artificial intelligence bots taking your order at the drive-thru speaker.
- Delivery charges will likely be challenged by operators, customers and customer advocacy groups. The years of losses incurred by the third-party delivery companies is expected to reach a tipping point where the delivery business either shrinks or is relegated to tighter urban locales where higher volumes and frequency can cover the costs of operation.
- Inflation or deflation? After a year or so of inflationary pressures on commodities, labor, real estate and construction costs, and menu prices, consumers will feel the pinch of inflation and may shift more dining experiences down to lower-cost fast food options. As restaurant companies log tougher comps on same-store sales, we expect discounting will come back as a means to drive traffic. Government stimulus checks mailed to individuals will be a much tougher sell as deficits start to matter again, and there are scenarios in which deflation could be a risk in 2022.
- Lending to restaurants, as a whole, is likely to remain tight as a result of the shock of the pandemic on certain loan portfolios. Credit will flow for profitable QSR operators with drive-thru windows in national brands, but it is likely to remain in short supply and conservative for the casual dining, fast-casual and buffet businesses as the paradigm is still shifting on their new normal operating environment. Valuations will reflect that uncertainty, but restaurants will remain a reasonable investment alternative as a smart way to follow consumer spending, which is the largest driver of the national GDP.
Rick Thompson is Managing Director, Franchise Finance for BMO Harris Bank.